The financial advice ombud has issued a second determination against a brokerage and two of its brokers, ordering them to compensate a Pretoria pensioner who invested in a hotel property syndication that has since been liquidated.
Noluntu Bam, the Ombud for Financial Services Providers, held Stephanus Johannes van der Walt, together with Barend Petrus Geldenhuys and Huis van Oranje Finansiele Dienste, jointly liable to repay 75-year-old Jeanne Peens R125#x202F;000, which she invested in the Blaauwberg Beach Hotel project between 2009 and 2010.
According to the ombud#x2019;s ruling, Peens is one of thousands of investors who invested in Purple Rain Properties, trading as Realcor.
Realcor was an authorised financial services provider that sold one- and five-year debentures (an investment in a long-term loan), as well as various classes of shares, to build the hotel.
Realcor was liquidated before the hotel was completed.
Bam#x2019;s ruling says Realcor targeted the elderly and those making provision for their income in retirement, offering them monthly interest payments and dividends of more than 10#x202F;percent. This was despite the fact that the hotel had not been built and there was no #x201C;legitimate economic activity to generate the cash flows#x201D;.
Realcor used various subsidiary companies, including Midnight Storm Investments, Grey Haven Richees and Ipobrite, to obtain funding from the public. The investment was publicised as safe and guaranteed, with minimal risk that investors would lose their capital, because it was in property.
In April 2008, in response to allegations that Realcor was raising money unlawfully from the public, the South African Reserve Bank ordered an inspection of Realcor, which was conducted by PricewaterhouseCoopers (PWC).
The Reserve Bank found that Realcor was conducting the business of a bank without being registered as one.
It prohibited Realcor from raising further deposits and took steps to have investors#x2019; money repaid, appointing PWC as the managers to supervise Realcor for the Reserve Bank.
Attempts to put the company under business rescue failed, and its main creditor, First National Bank, filed for liquidation, according to the ruling. The incomplete building was eventually sold for about R50#x202F;million, but investors did not receive a liquidation dividend, the ombud says.
Brokers who sold Realcor Investments took the matter to court, asking that PWC be held liable for investors#x2019; losses and contending that the Reserve Bank#x2019;s intervention had caused Realcor to collapse, the ruling says.
But the court found that the Reserve Bank had not taken over the daily operations of Realcor and it remained under the control of its directors until it was liquidated, the ombud#x2019;s ruling says.
The ruling states that Peens contacted Van der Walt and Geldenhuys in response to a radio advertisement.
They saw her and she signed the investment forms and a record of advice the same day.
Bam says the record of advice Van der Walt and Geldenhuys produced shows that the financial products they considered for Peens were Realcor, the PIC property syndication and the Sharemax property syndication. They suggested Realcor, because it had the highest expected returns.
She says the basis on which Van der Walt and Geldenhuys considered the three property syndications to be suitable for Peens is #x201C;inconceivable#x201D;, given that she had experience only of investing in listed investment companies.
Van der Walt and Geldenhuys told the ombud that Peens did not want to provide them with the information they required to determine her financial needs.
But Peens told the ombud this was a lie, and she had not known that the advisers should have assessed her capacity to take on the risk and her tolerance for the risk before selling her the investment.
Bam says the brokers appeared to be #x201C;oblivious#x201D; to their responsibilities in terms the code of conduct under the Financial Advisory and Intermediary Services (FAIS) Act. The code states that, before giving you advice, an adviser must:
#x2022; Take reasonable steps to obtain information about your financial situation, your experience with financial products and your investment goals;
#x2022; Analyse the information gathered; and
#x2022; Identify financial products that are appropriate given your risk profile and financial needs.
The ombud says getting you to sign a record of advice does not exempt an adviser from carrying out the investigation he or she is, by law, obliged to do.
She says Van der Walt and Geldenhuys did not demonstrate the lengths they went to get the required information from Peens, despite the fact that she made three separate investments into Realcor.
Bam says Peens#x2019;s complaint #x201C;bears striking similarity#x201D; to a complaint that came before her office in 2012 from a pensioner couple who Van der Walt and Huis van Oranje advised to invest in Realcor. In that case, Bam ordered Van der Walt and Huis van Oranje to repay R695#x202F;000 to the couple, and she says the record of advice was a replica of that given to Peens.
She says Peens believed she was investing in a hotel, but the hotel was incomplete, and it is not clear what steps Van der Walt and Geldenhuys took to explain how the incomplete hotel would generate the promised returns.
Bam says Van der Walt and Geldenhuys contravened the FAIS Act and its code of conduct, because they did not act in Peens#x2019;s interests when they recommended a highly risky investment in an unlisted property syndication, even though her circumstances indicated that the product was not suitable.
She says they failed to act honestly, fairly, with due care, skill and diligence, as required by the FAIS Act, when they recommended an inappropriate financial product.
Bam says Peens would not have invested in Realcor if she had known about the high-risk nature of the investment, its structure, funding model and possible mismanagement, as well as the commission Van der Walt and Geldenhuys earned.